The Truth About MLM Businesses and How They Hurt Troops

Spouses shop during a Spouse Appreciation Day Bazaar at the Thomas Community Activities Center at Little Rock Air Force Base, Arkansas. (U.S. Air Force/Cliffton Dolezal)
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Task & Purpose30 Jan 2018By Crispin Burke

This article originally appeared on Task & Purpose, a digital news and culture publication dedicated to military and veterans issues.

Direct-sales businesses are prevalent in military communities, as military spouses and even some service members try to either launch full-time jobs or just make some extra cash on the side. These sorts of businesses raked in nearly $36 billion in sales in 2015 and have become so prevalent on military bases that one Duffel Blog, a military humor site, referred to the small army of scented-candle and oil-sales representatives as "SCENTCOM".

Direct-sales businesses -- often referred to as multi-level marketing businesses -- have been around for decades, ever since companies like Avon and Tupperware recruited employees to sell their products in exchange for a small commission on each sales.

They are often conflated with pyramid schemes, although there is an important legal distinction between the two. Pyramid schemes (which are illegal) gain the majority of their revenue from the recruitment of new members, while multi-level marketing businesses receive the majority of their money from the sales to external consumers -- as do most legitimate businesses.

That said, it can be difficult for outsiders to differentiate between legitimate multi-level businesses and pyramid schemes. Since 1996, 26 multi-level marketing businesses have been charged by the Federal Trade Commission for operating as a pyramid scheme, alleging that these businesses were less than forthcoming about the potential earnings for those who participate in them. Of those 26 businesses, each was either found guilty or was forced to settle out of court.

I spoke to several people who worked for multi-level marketing business, and some did indeed make money, including one person who made a killing selling sex toys to the spouses of a deploying Army brigade. But these are the exceptions rather than the rule. According to a study hosted on the FTC's website of nearly 350 direct-sales companies, roughly 99% of employees lose money after accounting for overhead costs, inventory, and other fees.

One researcher who spoke to me studied the spread of these businesses, comparing them to viral epidemics. Military communities are tight-knit and can be isolated from the rest of American society at large. Military communities also represent a giant, untapped labor pool for multi-level marketing companies.

Although military spouses are better educated than their civilian counterparts, according to a 2015 RAND study, they face high levels of unemployment as well as under-employment, with nearly half of all military spouses claiming they were over-qualified for their current or most recent jobs in terms of education level. Many military spouses cited difficulties finding jobs due to frequent moves -- generally every two to three years -- and the perception that employers would not want to hire military spouses. Not to mention, many military spouses may find themselves stationed overseas where costs of living are high, yet there are few job opportunities either on base or in the surrounding communities. Military spouses face further employment challenges, especially considering they are more likely to have children than their civilian counterparts and may have to act as a single parent for months at a time due to long deployments.

That said, when polled, many military spouses still felt a strong desire to work. But surprisingly, only around half of those polled said they wanted to do so to generate income -- over 90% of military spouses said they wanted to work for personal fulfillment. Underemployment and a desire for fulfillment drives many military spouses toward direct-sales businesses. One blog catering to the military community touted the benefits of direct-sales businesses, claiming they "fulfill a need."

Many in the military community reported being bombarded with requests to participate in multi-level marketing businesses schemes or attend parties selling products upon arriving at a new duty station, often feeling pressure to do so in order to fit in and make new friends. Even service members aren't immune. I was personally approached several times by members of a multi-level marketing firm specializing in energy drinks named Quixtar -- I even knew a fellow service member who was roped into the scheme. Quixtar, a subsidiary of Amway, was eventually sued for operating a pyramid scheme, settling out of court for $56 million.

Can anything be done to prevent service members from losing money to these types of predatory businesses? Yes.

For decades, payday lenders and shady car dealerships preyed on young service members, offering loans with exorbitant interest rates. Making matters worse was that payday lenders had plenty of political backing -- millions of dollars in campaign contributions and lobbying. But Congress eventually passed a series of provisions, which, although far from perfect, limited the amount of money payday lenders could charge service members. Since then, the Consumer Financial Protection Bureau designated Holly Petraeus to spearhead efforts to protect service members and their families from future scams. Service members and their families might benefit from similar oversight to curb losses from multi-level marketing businesses by requiring companies to buy back unused stock should participants not be able to sell it. Military life makes service members and their families vulnerable to certain unique financial threats -- consumer protection agencies should continue to assist military service members and their families.

Finally, more must be done by both the Pentagon and private industry to address the underlying issue which makes predatory businesses so prevalent on military bases: high unemployment rates among military spouses. Although there has been great progress in reducing unemployment among post-9/11 veterans, both public and private-sector agencies should now focus on providing America's military spouses with meaningful employment by partnering with agencies like Hiring Our Heroes or other such programs.